No Duty to Investigate Before Terminating Agent

In Texas Farm Bureau Mut. Ins. Co. v. Sears, the Texas Supreme Court addressed what duties an insurance company owes an independent agent when terminating an “at will” relationship. No. 01-0851 (Tex., Aug. 30, 2002). The court looked at whether there was a duty of care in investigating alleged misconduct, and whether there was a sufficient relationship to support a claim for intentional infliction of emotional distress. It refused to impose a duty to investigate and concluded that there could be no cause of action for “negligent investigation” because it would alter the “at will” relationship between the parties. In addition, the court recognized that the evidence presented did not rise to the level of extreme and outrageous conduct necessary to maintain a claim for intentional infliction of emotional distress.

The plaintiff, Sears, was an independent agent for Texas Farm Bureau. The agency agreement allowed either party to terminate the contract with ten days’ notice, and without cause. The court concluded that the “without cause” termination provision rendered the relationship one of “at will” employment under Texas law.

Sears was involved in a whistle-blowing action, with a twist. Initially, he was the whistle-blower. In 1983, Sears reported that an adjuster, local contractor, and some agents were involved in a kickback scheme. Over a period of years, he made similar reports and allegations, but Farm Bureau allegedly failed to act. In 1990, one of Sears’ clients and a Farm Bureau policyholder sent an anonymous letter to Farm Bureau and to the Texas Department of Insurance making similar allegations of a kickback scheme. This time, however, the letter alleged that Sears was also involved, and that Sears referred insureds to the contractor, who made inflated bids that were then approved by the adjuster.

Based on these allegations, Farm Bureau’s internal auditor reviewed Sears’ files and determined there were suspicious claims. Farm Bureau hired a private investigator to investigate the alleged kickback scheme.

Although the investigation uncovered no direct evidence that Sears was involved in any illegal activity, Farm Bureau considered him a “suspect.” After reviewing the investigation, Farm Bureau terminated Sears and turned over the results of the investigation to the Department of Insurance, the United States Postal Service, the U.S. Attorney’s Office, the Internal Revenue Service, and other federal agencies. Some of these reports were based on the possibility that Sears had received income from kickbacks, which he had failed to report on his tax returns. Farm Bureau also attempted, unsuccessfully, to have Sears’ agency license revoked. Ultimately, the adjuster and contractor were indicted, and the contractor was convicted, but no criminal action was ever pursued against Sears.

Sears sued Farm Bureau, the office manager, and the district manager, alleging defamation, negligent and grossly negligent investigation, negligent and intentional infliction of emotional distress and wrongful discharge. In the lawsuit, Sears asserted that Farm Bureau had no guidelines for the investigation, and unfairly targeted him with unethical investigation methods. The allegedly unethical methods included implying to the police that Sears was involved in criminal activity, and contacting other insurance agencies regarding Sears’ activity.

At the trial court level, the office manager and district manager obtained summary judgment on all claims. Farm Bureau obtained summary judgment on all claims except negligence and intentional infliction of emotional distress. At trial, the jury found Farm Bureau liable for negligent and grossly negligent investigation and intentional infliction of emotional distress, awarding both compensatory and punitive damages. The court of appeals affirmed in regard to the intentional infliction of emotional distress claim, but reversed and remanded the claim of negligent investigation. In its opinion, the Waco Court of Appeals concluded that Farm Bureau owed Sears a duty of ordinary care in its investigation, but found there was factually insufficient evidence of a breach of that duty.

The Texas Supreme Court first looked at what duty of care is owed to an “at will” employee. The court acknowledged that, consistent with the “at will” relationship, an employer has no duty to investigate before terminating an “at will” employee. The very essence of that relationship is that it may be terminated, at any time, without cause, reason or justification. The court noted, however, that there is a conflict among courts of appeal as to whether a duty of ordinary care was owed, if an employer decided to investigate alleged misconduct. In many other instances, the court has recognized that, even where a duty is not owed, if it is nevertheless undertaken, it must not be undertaken negligently.

The court also engaged in a policy analysis of the risks of negligent investigation versus the burden of imposing an additional duty on the employer. The court of appeals had emphasized the potential risks of damage to the employee’s reputation and loss of future income, versus the slight burden to employees, who have control of their own investigations. The Supreme Court concluded that the court of appeals had improperly assessed the burden on the employer.

The Texas Supreme Court focused on the essence of the “at will” relationship, and the damage this relationship would be caused by imposing a duty of ordinary care in investigation. The court emphasized Texas’ long recognition of “at will” employment relationships, and the multiple past occasions on which it had refused to impose additional duties that conflicted with that relationship. In particular, the court noted cases refusing to recognize a duty of good faith and fair dealing in the employment relationship, and refusing to find a common law whistle-blower exception to “at will” employment. See City of Midland v. O’Bryant, 18 S.W.3d 209, 216 (Tex. 2000); Austin v. Healthtrust, Inc., 967 S.W.2d 400, 403 (Tex. 1998).

The court also surveyed the law of other states, and noted that the vast majority of other states have refused to recognize a duty to investigate before terminating an “at will” employee, or a duty to investigate alleged misconduct with ordinary care.

Ultimately, the court refused to impose a duty to investigate or to use ordinary care when an investigation is undertaken. Explaining its conclusion, the court stated that “by definition, the employment ‘at will’ doctrine does not require an employer to be reasonable, or even careful, in making its termination decisions. If the ‘at will’ doctrine allows an employer to discharge an employee for bad reasons without liability, surely an employer should not incur liability when its reasons for discharge are carelessly formed. In grafting a negligence exception on our ‘at will’ employment jurisprudence would inevitably swallow the rule.”

The court also noted the inherently inconclusive nature of most investigations of disputed claims. The court concluded that “second guessing” an employer’s judgment would be a disincentive to even investigate allegations of misconduct, and that this result would not be in the public interest. The court also reasoned that it would ultimately be against employees’ best interests if the threat of liability effectively encouraged employers to discharge employees without attempting any investigation.

The court then turned to a review of the evidence supporting the claim for intentional infliction of emotional distress. Under Texas law, the standard for liability is high and requires that the defendant acted intentionally or recklessly, the defendant’s conduct was extreme and outrageous, and the actions caused the plaintiff emotional distress, and the emotional distress was severe. The “extreme and outrageous” element requires the defendant’s conduct to be “so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized society.” Twyman v. Twyman, 855 S.W.2d 619, 621 (Tex. 1993).

Sears argued that Farm Bureau’s investigation—in particular the private investigator’s attempts to target Sears while ignoring Sears’ early attempts to report kickback schemes, and the misrepresentations to police that he was involved in criminal activity—rose to the level of extreme and outrageous behavior. The Supreme Court disagreed, and concluded that the conduct, while “unpleasant,” was consistent with an investigation of alleged insurance fraud and was in the nature of an ordinary employment dispute.

Sears also argued that Farm Bureau exercised a personal vendetta, after he was terminated, by reporting the results of its investigation to various agencies and attempting to have his license revoked. The Supreme Court rejected this argument as well. The court reasoned that, while Farm Bureau’s motive was certainly relevant, the conduct itself was still not sufficiently outrageous to support the claim.

While the court refused to impose an additional duty on employers, it should be noted that there are still causes of action which may exist, even in the termination of an “at will” relationship. The claim for intentional infliction of emotional distress was rejected on the facts. When the employer’s conduct is more extreme, the employer may be liable. Sears did not seek review of his other theories of liability. Depending upon the facts, representations to other parties, regarding the cause of termination, may support a claim for defamation. In addition, in certain circumstances, there may be viable causes of action for invasion of privacy, or for tortious interference with a contractual relationship. The court’s opinion should not be read to hold that no relief is available if an “at will” relationship is terminated “wrongfully.” Instead, the court’s limited conclusion is that an employer, in an “at will” relationship, has no duty to investigate the employee’s conduct and, if an investigation is undertaken, it has no duty to conduct the investigation with ordinary care.

Bradley is a partner in the Dallas office of Thompson, Coe, Cousins & Irons, L.L.P. She is a member of the Insurance Litigation and Coverage Section and leads the firm’s coverage practice. She has represented agents in disputes with policyholders and insurers and routinely represents insurers in evaluating and litigating coverage issues under general and professional liability policies, commercial auto and trucking policies, commercial property policies and homeowners polices.

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